Brazilian Real To Rally On Social Security Reforms, GBP Dragged Lower By Brexit
Posted by Elaine Housten in Brazilian Real, Pound Sterling Forecasts, - 10 Jul 2019 13:35
The UK Pound to Brazilian Real (GBP/BRL) exchange rate fell to a fresh post-January worst on Tuesday, putting the yearly low in its sights before edging marginally higher into Tuesday's session ahead of key UK data. Sterling was last seen trading at R4.7393, up a modest 0.06%.
With the Tory leadership contest raging on, the risks around no-deal Brexit continue to intensify, weighing heavily on the GBP and threatening to cripple second quarter GDP growth.
Tuesday saw UK lawmakers take steps to erect barriers to a no-deal outcome with MP Dominic Grieve's motion narrowly passing (294 to 293) a vote in the House of Commons. The amendment will force the government to deliver bi-weekly reports in the House of Commons, thereby thwarting attempts to suspend parliament in order to force an end of October Brexit, with or without a deal.
"I freely admit that one of the purposes behind these amendments is to try to ensure that this extraordinary threat ... - that we should be prorogued - can be banged on the head,” said Grieve on his proposal.
In what appeared to be a flagrant disregard for the will of the majority, front-runner in the race to become the next PM, Boris Johnson refused to rule out the suspension of parliament as a route to securing a Halloween Brexit, deal or no deal.
Wading into the controversy, ex PM John Mayor told BBC radio on Wednesday that he, among others, would take legal action to block a new leader from delivering a no-deal Brexit by suspending parliament.
"In order to close down parliament the prime minister would have to go to her Majesty the Queen and ask for her permission to prorogue. She is then in the midst of a constitutional controversy that no serious politician should put the queen in the middle of,” said Major, adding "If that were to happen there would be a queue of people who would seek judicial review. I for one would be prepared to go and seek judicial review.”
Turning to data, with Brexit taking its toll on underlying activity, Wednesday's GDP growth release is expected to come under intense scrutiny. Despite consensus estimates at 0.3% (m/m), a number of analysts are looking for flat or even negative second quarter growth which could spur a more dovish Bank of England.
"A general pound malaise has taken us through the lows from Friday,” wrote CIBC head of G10 currency Jeremy Stretch, adding "It looks increasingly probable that second-quarter GDP is likely to be negative for the first time since the end of 2012. With the third-quarter outlook also poor, this will add to debate about the BOE joining the global easing trend.”
For Sterling therefore, the outlook remains relatively one-sided with political chaos and weakening fundamentals leaving the GBP vulnerable to further downside in the near-term.
"A bounce back in car production should lift May's UK industrial production today, but the mood for GBP is certainly sour..." wrote ING economists.
Brazilian Real Tipped to Rally on Social Security Reforms While the GBP's been largely on the back foot, BRL gains have been gathering momentum over recent sessions. After being set back by a solid US jobs report late last week which spurred markets to temper Fed rate cut bets and dented earlier Latam FX gains,Real appreciation has gained traction on hopes of sizeable domestic reforms being passed imminently.
After years of negotiations and no shortage of political turmoil, the special pension reform committee in Congress passed the basic text of a bill which should generate savings of around $264 billion over a decade, shore up public finances and spur investment and economic growth.
The final hurdle for the bill will be a vote in the Lower House - expected to take place this weekend - with a 60% majority required to pass.
"The approval of the reform should have an invigorating impact on the outlook for economic activity, but the reform should also have a benign impact on the inflation outlook," wrote ING economist, Gustavo Rangel, adding "The balance of risks favours a larger, more frontloaded and more lasting rate-cutting cycle than currently priced in the local curve."
With the reform likely to be approved, political uncertainty around the sustainability of fiscal accounts should ease somewhat, lending to an improved outlook for economic activity and local assets.
The Brazilian Real is also expected to rally on the approval of the bill although anticipated easing from central bank could limit the magnitude of Real gains.
"The Brazilian Real should also rally, but the extent of that rally should be limited by the central bank’s willingness to cut rates (by as much as 150bp), which should reduce the currency’s appeal," added ING's Gustavo, and that "Lower rates should also incentivize the use of the USDBRL as a (relatively cheap) hedge to external risks, such as trade wars, as other local assets such as equities and rates are seen as more appealing."
Moreover, with the Fed expected to commence a cutting cycle imminently, emerging market currencies in general could be set for a rebound - Wednesday's FOMC meeting minutes for June and Federal Reserve Chairman Jerome Powell's testimony could provide investors with some much-sought clues on the magnitude and timing of the expected easing.
"We think it'll (the post US jobs report weakness) be short-lived and recommend buying dips, particularly in EM currencies," wrote Morgan Stanley analysts in a research note, adding "Even if the Fed only cuts 25bp (99.7% implied probability) but provides dovish guidance, then we'd expect the bid for EM currencies to remain."
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